Part 1 - AL-Tax

International Taxation Handbookdetailed discussion). Information exchange is at the heart of the EU’s savings taxdirective, which has been in effect since July 2005. The EU savings tax directiveprescribes that 22 of 25 Member States share automatically between each othertax information on residents’ cross-border interest income. However, three of thesmaller EU Member States – Austria, Belgium, and Luxembourg – are allowedinstead to levy a withholding tax on the savings income of residents of otherMember States. To prevent capital flight, the European Commission has negotiated‘equivalent measures’ with five non-EU countries and a group of dependent andassociated (DA) territories of EU countries. Information sharing also featuresprominently in the OECD’s controversial ‘Harmful Tax Practices’ project (OECD,1998), which began by identifying, in June 2000, 35 noncooperative tax havens forfurther analysis and dialog. In the policy debate, this country list is often referredto as the ‘OECD blacklist’. Listed jurisdictions were asked to enter into commitmentsto put in place effective information sharing and transparent tax practices.Given the strong focus of recent policy initiatives on tax information sharing,it is of importance to understand its economics. While the literature has paidmuch attention to the institutional arrangements and practicalities of tax informationsharing, the economics of the issue has not been extensively analyzed.The theoretical academic literature – which typically employs two-country, gametheoreticmodels – is relatively small (key contributions are those of Bacchettaand Espinosa, 1995, 2000; Eggert and Kolmar, 2002a, b, 2004; Huizinga andNielsen, 2003; Makris, 2003; Keen and Ligthart, 2005, 2006b). Tanzi and Zee (1999,2001) provide an informal analysis of incentive issues in information sharing,while Keen and Ligthart (2006a) give a comprehensive overview of informationsharing issues on which this paper partly draws. When analyzing the informationsharing issue, many policy-relevant questions arise. Why would source countries(that is, those in which the savings income arises) voluntarily choose to providetax information to residence countries (that is, those in which the private investorresides), thereby making themselves less attractive locations to foreign investors?Does the unbridled pursuit of self-interest induce countries to provide an optimalamount of information? Why is it – as the experience with the EU savings tax hasbeen – that relatively small countries prefer to levy withholding taxes at source,whereas large countries favor information sharing? This chapter presents what isknown about these questions to provide insight into the economics of informationsharing. More specifically, it employs these insights to analyze the workings andeffectiveness of the EU savings tax directive as a case in point.The chapter is organized as follows. Section 10.2 sets out the general principlesunderlying the taxation of cross-border savings income. Section 10.3 discusses the242